Conpet S.A.'s (BVB:COTE) Dismal Stock Performance Reflects Weak Fundamentals

It is hard to get excited after looking at Conpet's (BVB:COTE) recent performance, when its stock has declined 11% over the past week. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Conpet's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Conpet

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Conpet is:

8.6% = RON61m ÷ RON707m (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. So, this means that for every RON1 of its shareholder's investments, the company generates a profit of RON0.09.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Conpet's Earnings Growth And 8.6% ROE

At first glance, Conpet's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 16% either. As a result, Conpet's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

We then compared Conpet's net income growth with the industry and found that the average industry growth rate was 7.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Conpet fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Conpet Using Its Retained Earnings Effectively?

Conpet has a three-year median payout ratio as high as 103% meaning that the company is paying a dividend which is beyond its means. The absence of growth in Conpet's earnings therefore, doesn't come as a surprise. Its usually very hard to sustain dividend payments that are higher than reported profits. That's a huge risk in our books. You can see the 2 risks we have identified for Conpet by visiting our risks dashboard for free on our platform here.

In addition, Conpet has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Conpet. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.